If you are considering starting your own business or in the process of working on a plan, one of the first decisions to make is deciding on which business structure works best for you and your business. Each business type has its own personal asset protection, tax, and operational implications. Understanding your business needs and how these business types affect your business is undeniably important to your company’s overall success.

With this in mind, we organized the benefits and limitations of each structure. Our dedicated filing professionals can also provide in-depth explanations of each structure, so do not hesitate to ask for help when deciding which business type is the best fit for you and your business.

For a full chart comparison, click here.

LLC (Limited Liability Company)

LLCs are widely known as “pass-through” entities because the profits of the company flow directly to the managers/members. This type of business structure is quickly becoming the most common form of incorporation. LLCs have a relatively flexible structure that provide many of the benefits of a partnership or sole-proprietorship, with some of the protections provided by C corps and S corps. They do not require many of the formal processes required by other types of corporations.

However, LLCs are unable to offer stock to the public and are still required to keep a fair amount of internal paperwork. LLCs do still require an owner to follow filing regulations. Companies that abuse the flexibility offered by filing as an LLC can lose their personal liability protection, in a process called “piercing the corporate veil”. If this happens, business owners can retroactively be held liable to pay corporate debts with personal funds.

Pros:

  • Liability protection
  • Easier process for setup
  • Flexibility on taxes

Cons:

  • Self-employment taxes
  • Difficulty attracting investors for funding
  • Added formation costs and franchise tax for some states

Learn how to form an LLC in your state:

Alabama

Alaska

Arizona

Arkansas

California

Colorado

Connecticut

Delaware

D.C.

Florida

Georgia

Hawaii

Idaho

Illinois

Indiana

Iowa

Kansas

Kentucky

Louisiana

Maine

Maryland

Massachusetts

Michigan

Minnesota

Mississippi

Missouri

Montana

Nebraska

Nevada

New Hampshire

New Jersey

New Mexico

New York

North Carolina

North Dakota

Ohio

Oklahoma

Oregon

Pennsylvania

Rhode Island

South Carolina

South Dakota

Tennessee

Texas

Utah

Vermont

Virginia

Washington

West Virginia

Wisconsin

Wyoming



Corporation (C Corp vs. S Corp)

A C corp is what most people think of when they hear the word “corporation.” Most large companies are filed under this structure, as it offers the most asset protection and tax-related options for business owners. It is also typically the only choice for owners that would like to be taxed separately from their company.  

Choosing the C corp structure for your business isn’t the best choice for everyone. Filing as a C corp requires a great deal of paperwork, as well as formal processes that must be carefully and regularly filed. C corps are often also much more closely monitored than other types of businesses, due to the fact that they are one of two types of corporations that can issue stock to the public.

An S corp is very similar to a C corp in that it provides a great deal of asset protection and tax options for business owners. It is also the only other structure that can offer stock to the public, but in a much more controlled and limited manner than a C Corp. 

There are a few differences between an S Corp and C Corp. Most notably, owners of an S Corp can claim operational losses as part of their personal income should the business fail to turn a profit. In addition, all business owners of S Corps must be U.S. citizens, which can limit international growth.

Pros:

  • Ability to take the company public and issue stock
  • More attractive structure for investors
  • Liability protection
  • A possible lower tax rate

Cons:

  • Double taxation (company and personal income)
  • Extra paperwork
  • Strict regulation

Learn how to incorporate in your state:

Alabama

Alaska

Arizona

Arkansas

California

Colorado

Connecticut

Delaware

D.C.

Florida

Georgia

Hawaii

Idaho

Illinois

Indiana

Iowa

Kansas

Kentucky

Louisiana

Maine

Maryland

Massachusetts

Michigan

Minnesota

Mississippi

Missouri

Montana

Nebraska

Nevada

New Hampshire

New Jersey

New Mexico

New York

North Carolina

North Dakota

Ohio

Oklahoma

Oregon

Pennsylvania

Rhode Island

South Carolina

South Dakota

Tennessee

Texas

Utah

Vermont

Virginia

Washington

West Virginia

Wisconsin

Wyoming



Nonprofit

Nonprofits have a charitable purpose or association with the organization, and are eligible for tax exemptions. In order to receive a tax-exempt status with the IRS, the nonprofit’s purpose must fall under section 501(c)(3) of the Internal Revenue Code:

“... corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals.”

Nonprofits are similar to corporations through their structure and process of creation. View our step-by-step guide to forming a nonprofit here.

Pros:

  • Tax exemptions
  • Personal liability protection

Cons:

  • Little-to-no salary offerings (staff are expensive)
  • More difficult to raise capital
  • Extra paperwork

Sole Proprietorship

In a Sole Proprietorship, only one owner is on file. Unlike LLCs or Corporations, states do not require you to file your business periodically. However, Sole Proprietors also require a DBA to register a business name, and the owner is held liable for all losses, legal issues, and/or debt that the business accrues. There is little-to-no distinction between the entity and the business owner. Examples of Sole Proprietors include freelancers, artists, consultants, virtual assistants, and other home-based owners.

Pros:

  • Easy setup with low fees and little paperwork
  • Flexible management structure

Cons:

  • Personal liability for all debts, legal obligations, and losses of the business
  • You must register your DBA in all counties you plan to operate your business
  • More difficult to raise capital
  • No ongoing business life (business ends with the owner)

General Partnership

General partnerships allow for two or more business owners, also considered “partners.” General partnerships also require a DBA to register a business name. Under this structure, a business cannot issue any type of stock, and partners are held personally liable for any taxes or debts. There is no legal separation between individual assets and business assets. Additionally, like a sole proprietorship, the partnership dies when one or more of the partners exits the partnership. However, provisions can be made as long as 2 or more partners remain in the business.

Pros:

  • Easy setup with low fees and little paperwork
  • Flexible management structure

Cons:

  • The business ends when one of the partners exit the partnership
  • Partners have personal liability for all debts, legal obligations, and losses of the business
  • Partners are liable for the actions of other partners

Need assistance in registering your DBA? Swyft Filings can help. Learn how we can help you form a DBA here.

Factors to keep in mind when choosing a business entity:

Personal liability, taxes, cost of formation, paperwork, and management structure are common factors that distinguish business entities from each other. Evaluate your business to understand which business entity you should choose long-term.


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